How to get your business ready for outside investment

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28/08/2017

If you’re looking for additional capital from outside investors, the better you can position your business to their needs and what they’re looking for, the better your chance of success.

Find out what each investor wants

It's important to remember that different types of investors usually have different goals.

Family and friends

They may be happy with a better return on their investment than they’d get if they’d kept their money in a savings account. Possibly seeing you do well is the key outcome.

Angel investors

These are wealthy individuals who provide capital in exchange for a higher interest rate or some ownership equity, or a mix of both.

Venture capitalists

These are professional fund companies that will almost always take a percentage of your business in exchange for the cash.

The UK Angel Investment Network has a section on Funding for Small Businesses that provides an overview of angel investors and venture capitalists.

Crowdfunding

This allows you to profile your business and attract investment (or loans) from a range of different people who wouldn’t normally be eligible to invest in new businesses without a prospectus. LendingCrowd’s website on Crowdfunding Scotland is a great place to start.

What you need to do

Regardless of who invests, there are some things you can do to ‘prepare’ your business to make it look more attractive to an investor, and to increase the value.

Up to date and accurate financials

Investors like to know that their money is being put to work to increase profits, not to pay off debt. Similarly, they’re not going to be keen on investing in a business that doesn’t have proper accounting processes in place.

To make your financials look better you should look at;

• Reducing or re-structuring your debt. Use any spare cash flow to limit any exposure to debt, and consider transferring higher costs such as overdrafts to a term loan.
• Reducing any fixed costs that may not be necessary. Investors will like that you run an efficient business which can operate on a lean budget.
• Using accounting software for up to date records. Talk to your accountant about how to effectively present your financial systems to their best advantage.
• Clear any old or obsolete equipment from the asset register.
• Check your industry standards for inventory levels to ensure you’re not overstocked.
• Review your financial ratios such as gross profit to sales and debt to equity, ideally seeing these if not improving then at least stable.

A great management team

At the end of the day your financials might look great, the product or service might seem revolutionary and the industry might appear the next best thing to a gold mine, but it all fails if you don’t have a great management team to implement the business. Investors want to see a well-knitted team that is committed and enjoys what they do. If you don’t have the right person for a key role, then explain you will get them once the funding is raised.

The second challenge is that managing a business with 10 employees is different from 100 employees (if your growth plans work). Cover the restructuring of management to cope with growth in your proposal and show how you will deal with this challenge and with your own evolving role in the company.

A clear strategy

A clear strategic plan outlining where do you see your business in five and ten years time. Investors want to see your long-term thoughts, even if these are only educated guesses. A strategic plan is a test of your vision and your ability to plan ahead. It should include:

• Where are you at now, and how you got there
• Market size (local and international). Specify statistics and other hard facts to support your claim that your business can capture a viable share of the market.
• All existing and potential competition. Focus on why you’re different, and why you are better than the competition.
• Barriers to entry. Investors will want to know how easy it might be for competitors or imitators to copy your lead. Higher barriers to entry will be more attractive than the reverse.
• Credible professional advisors. Who is assisting you in your business? The more outside experts you have (even if they are only called in on an ‘as needed’ basis), the better.
• Future products/services potential. Outline how you might develop your product or service going forward. Make sure you have something else on the drawing board to show continuity and that your business has more opportunity in the future.
• Profile any technology. What exactly is your technological advantage over the others? Has this been independently verified by an expert.
• Environmental regulatory requirements. Is there any legislation about to impact on what you do (either negatively or positively?).
• Intellectual property you own, which may be the most valuable asset you have. Make sure it is yours and that your employees don’t think they own it. Cover any brands, patents, trademarks or existing copyright you may own.

Be confident and optimistic

Although it’s important to remain realistic, it’s still essential to promote the positive aspects of your business, those that would appeal to potential investors. Keep the following in mind:

• Make your pitch as clear as possible, and in just a few minutes. Investors want to know that you can explain your business succinctly, but briefly. You want to explain quickly and clearly how your business model can make lots of money.
• Be knowledgeable about current and potential competition. Investors will be impressed that you’re up-to-date with who else is in the market.
• Keep the focus on benefits and financials. You don’t need to spend time talking about technology. If they want to know more about the technology behind your products or services, they’ll ask.

As much as you can, establish a good rapport with them. After all, you’re going to be in business together, so it’s important to get along with each other. Make sure they know you’ve got an open mind when it comes to their advice – a good investor will have lots to offer in the way of experience and contacts.

Have a clear exit strategy

Yes, developing an exit strategy before you’ve even got investment needs to be covered; the investors then know you are thinking about the end goal. The most common exits are:

• A corporate buy-out. This is where a large corporation likes your business and thinks it will fit in well with theirs.
• A management buy-out. You and/or key staff buy out the investors.
• A management buy-in. Another syndicate buys into the business and manages it.
• An Initial Public Offering (IPO). This is where you list your company on a stock exchange, so that investors can sell their shares.

Summary

Attracting investors is down to presenting your business in the best possible light, while still remaining realistic. Investors won’t be interesting in financing a business that’s in trouble, so they’re not a good option if your main goal is to solve financial difficulties. Investors are interested in businesses that will pay off for them down the line, so your main priority is showing them how your business will achieve that.

Additional resources

• 11 foolproof ways to attract investors
• How to attract an investor